In a continuing effort to understand where we stand in light of QE∞ (QE3) attempt to grasp what the future may hold as a result, we’re studying the possibility of more QE implementation. As noted already, it’s entirely possible that QE∞ has been going on all along in the form of bond buying. If such is the case, then we’ve just entered QE∞2 (or QE4), due to the unending nature of the program. Some are calling the next round of QE, QE4ever.
Many are focused on stock prices, as if they’re the driving force of the economy. The reality is that employment and income ultimately determine the state of the economy. However, because the uber-rich can continue playing the stock game to meteoric heights, dragging investors with them, many gauge the economy by the stock market; forgetting the fact that a vast number of Americans have never owned a single share, and never will. It’s all they can do to simply keep food on the table and a roof over their heads.
Adam Parker, chief U.S. equity strategist for Morgan Stanley, is focused on stock prices. There are so many odd things about this consideration that it’s tough to grapple with them. Here are a couple though.
As noted above, the economy runs on the backs of those who work. Politicians are supposed to represent the ones who work. Corporations are supposed to supply and employ those who work. However, as cronyism has grown to overwhelming proportions in our economy, the politicians and corporations have become partners in an effort to consolidate wealth. Of course, they’re puppets of the FED, but we’ve discussed that before.
However, especially when it comes to banks, this is why the focus of QE has been on bonds and is currently on mortgage backed securities. It’s said that this helps the economy. Actually, it helps the banks. The working man is not benefited by this. In fact, in the long run it denigrates his earnings through inflation and makes saving all but impossible.
Another oddity about this comment is the fact that stock indices are up right now. This is one of the reasons the FED’s recent QE announcement seemed to be timed all wrong. But maybe this is all part of the puzzle. Stimulate mortgages first, then the markets at a later date. Parker comments:
We wouldn’t be at all surprised to see the Fed dramatically augment this program (i.e., QE4) before year-end, particularly if economic and corporate news continue to deteriorate as they have over the past few weeks. At this rate of MBS purchases, … we see only a weekly 25 basis points of expected return for the S&P 500.
While such a return can accumulate over months, it is dwarfed by weekly S&P historical volatility (3 percent since November 2008) and can easily be swamped by macro, earnings and geopolitical events.
This focus on the indices is unhealthy. While any stimulus is likely destructive in the long run, real stimulus should focus on the plight of the working man, not the bottom line of the banks and brokers. Dan Weil’s closing comments are certainly fodder for thought in this regard.
Some experts don’t even see QE as relevant for the economy at this point.
“QE3, QE4 or QE5 may not do much to boost the economy. The bigger issues are concerns about the election, regulation and the fiscal cliff,” Wilmer Stith, manager of the Wilmington Broad Market Bond Fund, tells CNNMoney.
There! Now don’t you feel better?
For your prosperity,
J. Keith Johnson
The Gold Informant